What Is a Licensing Agreement?

A licensing agreement is a written contract by which a property owner permits another party to use that property under a specific set of parameters.

Understanding Licensing Agreements

Licensing agreements delineate the terms under which one party may use property owned by another party. While the properties in question can include a myriad of items, including real estate holdings and personal possessions, licensing agreements are most often used for intellectual property, such as patents and trademarks, as well as copyrights for written materials and visual art.

[Important: Licensing agreements are widely used for the commercialization of technologies.]

In addition to detailing all parties involved, licensing agreements to specify in granular detail, the ways in which licensed parties may use properties, including the following parameters:

  • The geographical regions within which the property may be utilized.
  • The time period parties are allotted to use the property.
  • The exclusivity or non-exclusivity of a given arrangement.
  • Scaling terms, such that new royalty fees will be incurred if the property is reused a certain number of times. For example, a book publisher may enter a licensing agreement with another party to use a piece of artwork on the hardcover editions of a book, but not on the covers of subsequent paperback issuances. The publisher may also be restricted from using the artistic image in certain advertising campaigns.

Examples of Licensing Agreements

Licensing agreements are ubiquitous in many industries. For example, companies that use computer software for their daily business operations must typically enter into licensing agreements with the copyright holders of the software.

In the restaurant space, a McDonald's franchisee might have a licensing agreement with the McDonald's Corporation that lets them use the company's branding and marketing materials. And toy manufacturers routinely sign licensing agreements with movie studios, giving them the legal authority to produce action figures based on popular likenesses of movie characters.

Entering into a Licensing Agreement

The bargaining power of the two parties involved in a licensing agreement often depends on the nature of the product. For example, a movie studio that licenses the likeness of a popular superhero to an action figure manufacturer might have significant bargaining power in this negotiation, because the manufacturer is likely to profit immensely from such an arrangement. The movie studio thus has the leverage to take his business elsewhere if the manufacturer gets cold feet.

Those entering into a licensing agreement should consult an attorney because there are complexities that may be hard to grasp for those without a deep understanding of intellectual property law.